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[Snoopy]

Number three of the growth initiatives being pushed heavily is the 'Network Applications and Services' or NAS business. The language around NAS is a bit fluffy
"Network Applications and Services (NAS) products such as unified communications, cloud, security, industry solutions and integrated services. "
At the 'product level' I am not sure what that means, and where the competition is. This in turn makes it hard to assess the real growth prospects. On a reporting basis, NAS is subsumed inside the wider 'Enterprise' grouping. That makes tracking the progress of NAS not straightforward. But most of the growth seems to be coming from within the 'Telstra Purple' envelope.

	FY2019	FY2020	FY2021	FY2022	FY2023
NAS Revenue Growth	-4.1%	-2.8%	-10.0%	+5.8%	+2.2%
NAS Revenue	$3,477m	$3,379m	$2,621m	$2,773m	$2,834m
NAS EBITDA margin (1)	10%	17.5%	6.2%	11.5%	8.6%

Note

1/ EBITDA margin figures from FY2021 onwards obtained from CFO briefing materials for that year

The problem I see with the outlook for NAS is that the new growth is being made against a headwind of declining demand of legacy applications and the winding down of the nbn DA agreement.
"Industry solutions revenue decreased by $11.6% to $1,047m largely due to an expected decline in revenue from contracts outside of the nbn DAs in line with the maturity of the nbn roll out. (AR2020 p27)"

nbn commercial works are tied in with NAS in a way I do not fully understand. But I do know that whatever growth initiatives that are showing 'green shoots' look to be being strangled by the death of the 'old guard' applications (e.g. calling applications due to ISDN planned exit and market shift from traditional voice calling applications to integrated video solutions).

One of the Telstra growth engines has run into trouble.

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From the CFOs HY2024 Commentary

Looking at NAS revenue:
• Calling revenue, which is higher margin, declined approximately 18%, as it continues to be impacted by a shift from traditional voice to cloud applications. This was as expected, and the headwind continues to get smaller.
• Professional services was impacted by lower business confidence and a slower trading environment with customers holding off on projects and lower levels of pull through on other product sales. We also saw a wind down of a number of large infrastructure contracts. Professional services revenue fell 18% sequentially and contrasts to the 33% growth seen in FY23, or 8% excluding acquired businesses. Such a rapid change in trajectory made it difficult to adequately adjust our cost-base which was set up for more growth.
• Finally, revenue from cloud resale and equipment grew. These resale businesses are low margin and high variable cost, and margins were lower in the half. These revenue, cost overhang and margin factors all contributed to lower NAS EBITDA. Given our pipeline continues to show the impact of the slower trading environment, we have not assumed the typical second half uptick in NAS in FY24.

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Following this, the analysts got 'stuck in' at the Q&A session:

Q/ Eric Choi: "On NAS professional services, which has flipped from 8% underlying growth to 18% decline. I’m just interested in your view on how much of this is cyclical. At the Investor Day last year, you guys were talking to businesses reducing the number of licences, which is mostly a macro thing, which might reverse, especially if we get interest rate cuts, or how much of that is actually structural, i.e. some of your customers unbundling your services and going with other competitors? "

"A second question just on the trajectory of NAS. You’ve guided to none of the usual second half improvement. So I’m just thinking if there’s the potential for revenues to be flat, second half versus first half, the second half costs are usually higher as well. So I’m just wondering, is it possible for that NAS EBITDA to turn negative in the second half, especially since you’ve kind of guided to your cost out being FY25 weighted?"


A/ Vicky Brady (CEO): "On NAS professional services, as you point out, the decline we saw late in the year, late in the calendar year last year, it really did accelerate down quickly. And it was, in terms of what we saw, it was our sales pipeline. So what we’re seeing customers do is absolutely push out opportunities."

"We’re not seeing indications that that is unbundling and it going to competitors at this stage. Our read of what we’re seeing and the feedback we’re hearing from our customers, is absolutely a bit of a pullback on professional services. So focused on doing the things that are essential. So you would see our cloud resale business performed well, so customers are still demanding those services. However, where there was transformation activity or discretionary spend involved, we’ve certainly seen that pull back, particularly over the latter part of the calendar year last year."

"And so our assessment is that it is cyclical, certainly, in the professional services business. As you know, in our domestic Enterprise business, there have been structural changes underway in terms of DAC (Data and Connectivity) and calling, but this professional services decline we’ve seen does appear to be cyclical. And so I would read that as being very much linked to macro environment and business confidence, currently."

"In terms of the trajectory in NAS, as we called out, we have not assumed the usual uptick in the NAS business in the second half. And that’s why we did tighten the guidance range on Underlying EBITDA. I think the good thing is, obviously, it’s really important we address this immediately, which we are, with significant action underway. But importantly, NAS obviously sits inside the bigger Telstra business. And so we have mobile performing well, we have Infrastructure performing well, we have obviously Consumer & Small Business - Fixed, you can see the growth there in EBITDA as we really focus on productivity and getting our nbn resale margins at the level we need."

"So as to when we see that confidence return, I mean, I do think it is linked to the macro environment. And so we’re not assuming that uptick in the second half."

A/ Michael Ackland (CFO) / "I think the other point that I would pick up on, on NAS, is that we have seen growth this year in this half actually in our resale revenue. And while that’s not particularly helpful for margin, as we pointed out, it does mean that we’re continuing to sell into and expand our customer base around reselling, particularly security and cloud resell, that I think is positive for the future, as business confidence returns and professional services off the back of those security and cloud purchases become something that customers will look to as they get more confident."

"The other one is we also have traditionally in our professional services businesses had larger deals, and larger like infrastructure-led deals that
we’ve talked about in the past. I mean, particularly an example would be the TasGRN project (Tasmanian Government Radio Network, migrating eight different emergency response organisations onto a single digital network). And I think on a cyclical basis we are seeing a lull in those, which is also something that we feel very confident we are well positioned to deliver for customers in that space. So we would expect to see that coming back. When that comes back, I think, is going to be largely around what happens in the macro environment."




Q/ Entcho Raykovski/ "Are you able to give us any sort of a sense of what proportion of the cost out initiatives relate to NAS, as opposed to the other elements that you’ve outlined? You’ve got some enterprise agreements which are due to expire at the end of September. How contingent is the outcome of what you can do on the cost-out side? How contingent is it on the outcome from those enterprise agreements as well?"

A/ Vicki Brady (CEO) / "In terms of the productivity initiatives, we’re absolutely committed to achieving the large majority of that cost-out ambition that we have under T25 (the cost out plan). We have very immediate action underway, particularly looking at the NAS business, just given what we’ve seen in the first half of the year. And so that focus is on making sure we’ve got the NAS business absolutely set up for success."

"We are reviewing all of the elements of the cost structure there including, not just what sits inside the direct Enterprise and Telstra Purple business, but the function for that to support our NAS business across Telstra. So making sure we’ve got that set up for success. So that’s where our immediate focus is, along with looking more broadly at the initiatives and actions we need to take in terms of the broader cost out. We’re not giving any breakdown between how much of that relates to NAS in terms of cost out versus the overall ambition. But as you can see from the result, it has given us cause to reflect and look, and make sure we get the NAS business absolutely set up for success both on the costs side and the revenue side."

"In terms of the EAs as you spoke about, our enterprise agreements are due to expire end of September this year. We will commence obviously good faith discussions with our people and the unions over the coming period and we look forward to those discussions. We know we need to get the cost out and it needs to be delivered irrespective of where we land in terms of our EA negotiations and outcomes on wages."



Q Roger Samuel / "On NAS. I appreciate that you guys are trying to address the issue at NAS. But do you think that Telstra has a point of difference in professional services, or do you think that you’re better off outsourcing the professional services piece to the specialists?"

A/ Vicky Brady/ "I think we do have a differentiator when it comes to professional services, particularly in those professional services that sit very close to the connectivity we’re providing to customers. So some of the areas where we’re successful is in the security space, it is in that cloud space. And our
acquisition of Versent was all about really setting us up even more strongly, because we are a big provider and reseller of cloud services."

"So having Versent who are strong on the ability to do the install and the run components of those cloud transformations, that’s a great example where I think they sit together well. And we’re certainly seeing in the current geopolitical climate that customers are concerned about sovereign capabilities and they do want to make sure from a security point of view they’ve absolutely got peace of mind."

"So I think there are some elements there. That is part of our review, however, of the NAS business is to make sure we really stress test each of the products and services we’re producing in that portfolio and exactly to your point, being very clear on where we have an advantage of where we’re bringing things to customers that is highly valuable. So that is part of the work, as I said, on the revenue side as well as the cost side."




Q/ Brian Han / "In NAS, is it plausible that calling application revenues go to almost zero in three years’ time, and whatever little revenue is left is
reclassified as something else later on?"

A/ Vicki Brady/ "In terms of NAS and calling there is a real transition underway, which has been underway for some time now, and we’ve seen that accelerate through COVID and post-COVID. So if you think about what sits in that portfolio, some of the legacy stuff that sits there is some of what we would consider now a little bit old world. Voice solutions for in the office, whereas people are obviously transitioning to things like Teams ('Microsoft Teams' software package, incorporating office workspace chat and video conferencing) and those types of products."

"So there is ongoing revenue there, and that’s what we’re busy working on is transitioning and supporting our customers into that newer and more modern technology to support their calling and phone needs. In terms of reclassifying over time that would be more a broader question of whether we thought it made sense. Obviously we try not to move around our disclosures too much, because we know that creates more work for people trying to understand what sits in our portfolio and what are the trends period on period."




Q/ Nick Basile/ "On NAS, I’m just trying to understand whether you need to do the restructure, given the size of the business and its extent for Enterprise in general. And I know others have sort of asked around this, but what gives you confidence in improved contribution at that area in the future, and how should we be thinking about the phasing of a recovery in earnings? Or should we sort of expect that to fall to zero before we expect an improvement in that group?"

A/ Vicki Brady/ "We’ve got immediate actions making sure we’ve absolutely got the portfolio set up for future success. As I mentioned earlier, there’s definitely a cyclical impact at the moment and you can see that in professional services for us. I am absolutely of the view that in that part of our business and our overall domestic Enterprise business as we look medium to longer run, there is a lot of opportunity there as businesses digitise and make the most of technology that relies heavily on connectivity."

"So, as I said, I think there are areas there for us where we do have a successful business today. We’re feeling some cyclical impacts right now in professional services, and our focus is absolutely in making sure we’re taking the actions we need to take to have the cost base and revenue side of that business absolutely set up to be able to deliver at the level needed by our Enterprise customers."

"So, in terms of the phasing, as we talked about earlier, I do think the professional services decline we’ve seen is heavily linked to business confidence and the more macro environment. So, it is a difficult one to predict, and as we said, we haven’t assumed an uptick, the normal tick we would see in the second half of this financial year. So that phasing, I think, will be very much dependent on some of the business confidence and the more macro environment."



Q/ Jenny Wiggins/ "With regard to the NAS business, I was just wondering why are you only calling this out in a significant way now if the business has
been declining for some time? You did discuss the sort of drop in professional services revenue. I mean, did that fall off a cliff in the last six months? Was the decline, the weaker economy really the key reason why that has been falling?"

A/ Vicky Brady/ "Actually at our Investor Day in November last year, we did call out that we were seeing weakness in our professional and managed services business, and so we did adjust our outlook on that business at that time. Frankly then what we saw in the last part of last calendar year was a very significant drop-off, so the decline did accelerate very, very quickly. It was surprising, in fact, to see how quickly our sales pipeline dropped, and some of those opportunities moved out."

"So we did call it out in November, but to be fair, the acceleration in the decline post that did surprise us, and that’s why we’ve called out today very clearly in our first half results that that business is not where it needs to be, and we are taking immediate actions both on the revenue and the cost side of that business, although we remain confident that this business, medium to longer run, is a good business. But there is definitely some cyclical impact, is our assessment at the moment, particularly related to business confidence and the macro environment."




Q/ Grahame Lynch/ "I wanted to ask about AI, and specifically you’ve mentioned your progress in skilling and adopting AI internally. But it strikes me that you’re way ahead of the general economy there. So have you got plans to perhaps productise and monetise some of those internal systems and processes that you’ve developed, into offerings that you could get revenue from by selling them to Enterprise customers, for example?

A/ Vicki Brady/ "Where we are focused, and to your point, where are the revenue opportunities lie, is how can we help our customers unlock further benefits from digitising their businesses, including from AI. We have a number of areas there we’re excited about. So, inside our NAS business, we do have professional services where we do help our customers around digitisation and AI."



Q/ Derek Rose/ "I’m just wondering about the cost reductions with NAS. Is that going to include layoffs, and do you have any visibility on what specifics on that?"

A/ Vicki Brady/ "The work’s underway right now in terms of what are the things we need to do to really get the cost base of our NAS business in the right shape, to be able to make sure we’re delivering really efficiently for our customers end-to-end across the company. Right at the moment, that work is underway, so I’m not at a stage of being able to announce exactly what those impacts look like and what they will mean."

"Obviously, as we work through these things, our first priority is making sure any costs that sit in that business that aren’t people related, we’re absolutely optimising those. And then we will be obviously having to consider, how do we deliver efficiently end-to-end for our customers in our NAS business. And when we make those decisions, obviously the first priority will be communicating any change to our team members internally. "


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SNOOPY